Through 2010, electronics remained the top import and export by value, comprising 34.6% of total imports and 59.89% of total exports. The devastating 8.9 magnitude earthquake and tsunami that struck Northeastern Japan on March 11, 2011 has caused cracks in the supply chain, through power outages and water shortages, to ripple down to affect semiconductor fabrication plant (fab) operations, infrastructure facilities, and transportation services. A report released March 21, 2010 by the World Bank titled, “Securing the Present, Shaping the Future,” said the Philippines and China “are more connected to developments in Japan than the rest of Asia.” In 2010, exports to Japan equaled 4.1% of GDP. The following addresses the effects that the spate of natural disasters in Japan will have on the Philippines’ electronics industry and growth prospects in the near-term.
Japanese Global Share of Electronics
As the world’s largest supplier of silicon used to make semiconductor chips, Japan is an integral player in the electronics industry. In 2010, Japan accounted for one fifth of global semiconductor production, accounted for approximately 14% of the world’s electronics equipment, produced US$216.6 billion worth of electronic equipment compared to US$1.6 billion worldwide, and accounted for 60% of the world’s silicon wafers. Wafers are thin slices of silicon that are the substrate of semiconductor devices.
25% of global wafer supply to take a hit
Industry researcher IHS iSuppli said the earthquake in Japan has resulted in the suspension of about one-fourth of worldwide production of silicon wafers used to make semiconductors, due to the halting of manufacturing operations at Shin-Etsu Chemical Co.’s Shirakawa facility and MEMC Electronic Materials Inc.’s Utsunomiya plant. Both fabs combine for 25% of the global supply of wafers used to make chips. Shin-Etsu Semiconductor, a major silicon wafer supplier to memory manufacturers Elpida and Toshiba, has shut down production in their silicon wafer fabrication facilities due to equipment damage, water shortages, and power outages.
Nomura sees quake to jolt silicon supply and demand back into equilibrium
Global Trade Association Semiconductor Equipment and Materials International (SEMI)reported the impact on the supply chain is due more to the aftermath tsunami and power outages resulting from the nuclear crisis. Intermittent power supplies have also obstructed the transportation infrastructure. According to Japanese equity research firm Nomura Securities Co. Ltd., “there has been an oversupply of silicon for some time now and the firm’s analysts believe this interruption may only serve to push supply and demand back into balance.” Additionally, most semiconductor products used today have established secondary sources, typically coming from another country.
JP Morgan sees disruption as temporary
Wall Street analysts predict “disruption of the semiconductor supply chain… will be temporary and limited based on inventory buffers and alternate supply.” JP Morgan analyst Christopher Danely said the investment bank remained constructive on the semiconductor sector because the disruption to the supply chain does not alter the two reasons their viewpoint changed – “the end of most of the inventory correction and a change in our belief that an economic downturn is going to happen in the near future.”
Disruptions to the automotive industry
Digitimes insight reports the aftermath from the disasters in Japan will cause significant disruptions to the auto industry’s global supply chain as the country accounts for more than 30% of total car production worldwide. The supply of automotive chips will also be affected because semiconductors used in automotive applications, such as microcontroller units (MCU), usually require a longer period of time for validation. Digitimes reports that Renesas Electronics, Japan’s largest supplier of semiconductors to the automotive sector, still has six factories which remain closed.
Philippines’ trade performance
In January 2011, electronic products remained the top import and export by value, comprising 34.6% of total imports and 53.5% of total exports. Of the total 34.6% electronic products imported, semiconductors accounted for 28.8% at US$1.531 billion. Imports from Japan accounted for 10.5% of the total import shipments worth US$560.24 million. Of the total 53.5% electronic products exported, semiconductors comprised 39.7% at US$1.588 billion. Exports to Japan accounted for 14.1% of the total export shipments at US$565.81 million, the country’s third largest export market. The Philippines will be hurt by its strong relationship with Japan as 618 out of the 2,272 locaters in the country’s economic zones are Japanese electronics companies involved in semiconductor and auto parts manufacturing.
Philippines’ electronics industry and investments to take a blow
Ernesto Santiago, president of the Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI), said 18% of SEIPI’s total members are Japanese firms; these firms accounted for 20% of the Philippines’ total export in 2010. SEIPI warns that the major impact on Japan’s production is disruption to the supply chain. SEIPI provides news updatesconcerning developments in Japan. Trade and Industry Undersecretary Cristino L. Panlilo said that of the country’s total US$51 billion exports last year, US$31 billion were electronics and semiconductors; of the US$31billion, “20% involved Japanese firms that export and import local components for local assembly and reexport to Japan.” Panlilio warned these developments could cause a slowdown in investments inflow into the country.
Trade and Industry Secretary says Japanese firms have spare capacity
According to Trade and Industry Secretary Gregory L. Domingo, most of the Japanese manufacturing firms are operating using their inventory levels. Domingo said that “if the shutdowns are prolonged then the gaps could be bigger. We offer to fill in these gaps and provide assistance.” Japanese companies with local subsidiaries have spare capacities they can temporarily tap. ON Semiconductors, which operates six production facilities in Japan, has closed two sites due to damage to infrastructure services and is identifying options to shift production to its other facilities. ON Semiconductors operates two facilities in the Philippines, a Manufacturing Facility in Carmona and a Wafer Sort and a Final Test facility in Calamba Laguna.
Near-term prospects for the Philippines main import and export drivers, electronics and automobiles, remain gloomy as disruptions to supply chains in Japan increase the pricing of components. In response, manufacturing firms are considering obtaining alternative products by expanding local procurement and purchases from overseas manufacturers. Firms in the electronics and automotive industries are still assessing damages to their operations.
The disaster in Japan will weigh heavily on investments and remittances in the coming year. In 2010, remittances from Japan totaled US$883 million, 4.7% of the country’s total remittance receipts. Investments are also set to take a blow as Japan is the leading source of direct investment to the Philippines. According to the National Statistical Coordination Board (NCSB), of the total US$4.5 billion of foreign investments approved by the Philippines’ investment agencies in 2010, US$1.2 billion (27%) came from Japan. Rebuilding efforts in Japan may cause investments to be rechanneled to help foot the bill for reconstruction. This may compel the Aquino administration to reconsider selling Samurai bonds and switch to selling dollar-denominated notes to help narrow the country’s budget deficit.